The rise of China is underlined by the news today that the Chinese economy has just become the second largest in the world, moving ahead of Japan, the old number 2 (well behind the US, the undisputable number 1) in the past quarter.
This blog entry is conjecture on the future of the world. Conjecture is based on hunch, and my hunches have always served me well, an integration of the information I have accumulated through directed and casual information gathering. Hunch takes thousands of factoids, and our resulting opinions are not always cognizant of all of the influences. Little pieces of information, their sources unremembered, play a role in forming our opinings.
But I will try to outline the major current elements that are part of the news. You, dear reader, can look back at the history of these elements, with the internet at your fingertips, and explode this conjecture, or expand on it. With a little luck, and some debate, the differing conclusions that our opinions lead us to might help us converge on something closer to an expectation of future reality.
Why is this important? I have found in the past that studying success stories, and the issues that are raised by that success, are very helpful in figuring out what has been lost in the striving for success, and determining the elemenbts that we are prepared to sacrifice for future success.
And there is no doubt that China is a success story. With double-digit percentage growth for the past 30 years, the power that China has become today is beyond the most wild forecasts that could have been made with a straight face in 1980.
Today, China has the most valuable bank in the world (stock market valuation), globally determines the price of raw materials, and has become a powerhouse in the invention and application of new technologies.
The Chinese totalitarian state is still intact. For sure, lots of growing pains. The Chinese Government has made strategic investments in every industrial sector. Their high speed rail system is fast becoming the envy of the industrial world. With the invitation extended to the rest of the world to participate in their very aggreesive program, the Chinese have been able to dramatically expand their knowledge base in high speed rail by technology transfer from almost every industrial player in the world, all of whom want to participate in the Chinese market.
China is rapidly buttressing its own ability to develop the new technologies it sees as essential. While they grow their educational system (China now graduates about 5 times as many engineers as the US), they have been dependent in the past for technology transfer from a mature Western engineering sector. In the next few years, I can see this changing, as China builds on acquired technology with a new army of fresh graduates in every area of engineering and material sciences.
We are also seeing a trend in the brain-drain department. In the past, many of China's best and brightest migrated to the west for greater opportunity. Now, they are beginning to see their long term opportunities in China as brighter and better, with the advantage of living in their own country, where they understand the culture and the language better.
In my opinion, this can only accelerate China to the forefront of every area of scientific research.
But the most important lesson here is not that they have the raw science, but they have developed a better working paradigm to translate that science into practical products. Their high speed rail ("HSR") network is a good example, and one I will expand on, because more efficient transportation is probably the greatest determinant of future growth.
Back in the day, when I was studying economics, I recall being amazed that approximately 70% of the cost of everything is transportation. From the farm equipment that harvests the wheat, the trucks to get the wheat to the silos, and the ongoing distribution process (trucks, trains, ships). Including the transportation of people to and from work, the mechanical transportation of coal from underground to its final destination, the transportation of products into a local supermarket ---- the list goes on and on.
This cost of transportation does not include the cost of electricity distribution, or information distribution, just the physical movement of people, commodities, and products.
In many cases, transportation costs are often an unitemised expense, buried in cost of materials or distribution. When the U.S. Department of Commerce publishes its Statistical Abstracts, they provide detailed information on the Transportation sector of the economy, the figures account for the transportation sector, which they define as "civil air transportation, including inland waterways, oceanborne commmerce, the merchant marine, cargo, and vessel tonnages". They further report on the employment in the transportation sector, details on licensed drivers (some 200 million licensed drivers in 2005), but the total economic cost is not aggregated.
An economist will include, as part of their cost analysis, the "opportunity cost", or added expense/foregone income of such things as transporting the kids to school, and the time spent getting to work.
Now if transportation costs are 70% of GDP, then efficiencies in transportation provide a much greater boost to national productivity than any other investment.
China is implementing high speed rail for passengers, which will ensure that people can get to work much faster, and as a reult, put in more productive work hours for the same total travel/work day.
More importantly, the Chinese HSR network is going to move freight, on faster freight trains. As well, moving passenger trains to a dedicated rail network is allowing them better specialised use of older rail for freight purposes.
In the US, passenger systems (freeway, rail) are running at the same speed, or slower than they did 50 years ago. Freeway rush-hour congestion, combined with longer commutes, have contributed greatly to decrease in efficiency (often embraced by consumers because of the perceived benefit of a more desirable home in a preferred location).
So what are the consequences?
With no improvements to U.S. transportation, Chinese productivity improvements will go unmatched in the U.S. Already, Chinese business is a substantially lower-cost manufacturer than U.S. business, Their next target will be "last mile" deliveries in the U.S., to sidestep the overhead of U.S.-owned distributors.
Meanwhile, the greatest fear in the US economy is deflation, or shrinkage of the economy. In fact, we have been watching this process for many years. For example, computers halve in cost (or double in performance), about every 18 months. But overall, consumers have spent more on computing devices, because demand has risen faster than the prices have dropped. For example, if people purchase twice as much computing horsepower every 18 months, then the computer market remains at the same annual dollar sales. the fact that it has been growing indicates that demand is higher than the rate of cost reductions.
You have heard the arguments for Peak Oil, no doubt, which say that the amount of oil in the world is finite, and we will get to a point where the amount of oil available to be pumped will decrease every year.
Now think about the concept of Peak Computer Spending, which will be reached when cost reductions in computer production outstrip the increase in demand. there will be a shrinkage in the gross dollars spent on computers in the U.S.
This is only one of the possible areas of economic shrinkage. But to compete with the rest of the world, the US is going to have to match global prices with its exports, and this will mean vast new efficiencies that will be thrust upon us.
The U.S. has not had any serious technological challengers for well over 50 years. But now, we are seeing a race in Asia that is not threatening to overtake us, it is actually doing so. And it is not just China. India, Japan, Singapore, Malaysia, and Taiwan are all vigorously competing now, and Europe is playing in that world very happily.
And the U.S. continues to fall further behind the technological innovation curve.
OK, so what is my take-away message from this?
I am not happy about the Chinese social model, which will be empowered by their growing economic clout. I will expand on this in a later blog.
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